Exam 2 Flashcards
Which assumption requires accountants to divide the economic life of a business in to time periods called?
Periodicity Assumption
When do companies recognize revenue in the normal accounting period? When it is earned or when it is received?
When it is earned
What are the 2 main types of accounting?
Accrual based accounting and Cash-basis accounting
In accrued based accounting, revenues are recognized when ___________ and expenses are recognized when ___________
When they are earned; When they are incurred
In cash-basis accounting, revenues are recognized when ___________ and expenses are recognized when _____________
When cash is received; when cash is paid
Which type of accounting is NOT allowed under GAAP?
Cash basis accounting
What type of entry makes it possible to report correct amounts on the balance sheet and the income statement?
Adjusting Entries
Adjusting entries make it possible to report the correct amount on the:
A) Balance sheet B) Ledger C) Income statement D) A and C E) None of the above F) All of the above
D) A and C
Companies make adjusting entries every time they prepare __________________
Financial statements
What are the 2 types of adjusting entries?
Deferrals and accruals
Expenses paid in cash and recorded as assets before they are used or consumed are called ____________
Prepaid expenses (e.g. insurance, supplies, depreciation)
Cash received and reported as liabilities before revenue is earned are called ___________
Unearned revenue
Prepaid expenses are a type of adjusting entry that results in a _________ (credit/debit) to an expense and a __________ (credit/debit) to an asset account
Debit; credit
Accumulated depreciation is known as a ____________
Contra asset
Adjusting entries that have been made to record the revenue earned and to show the liability that remains are called ___________
Unearned revenues
Unearned revenues are types of adjusting entries that result in a _________ (credit/debit) to a liability account and a ________ (credit/debit) to a revenue account)
Debit; credit
Unearned revenues result in debits (decreases) in a __________ account and credits (increases) in a _________ account
Liability; revenue
Prepaid expenses result in debits (increases) in an _______ account and credits (decreases) to a __________ account
Expense; asset
Deferrals include 2 types of adjusting entries: __________ and _________
Prepaid expenses and unearned revenue
_____________ (Accruals or deferrals) is revenue earned / expenses incurred that have not yet been received or paid
Accruals
Revenues earned but not yet received are called _____________
Accrued Revenues
Expenses incurred but not yet paid are called _____________
Accrued Expenses
What type of adjusting entry shows the receivable that exists and records the revenue earned?
Accrued Revenues
Accrued revenue adjusting entries result in a debit to a __________ account and a credit to a _________ account
Receivable (asset); revenue
What type of adjusting entry records the liability and recognizes the expense?
Accrued Expenses
Accrued expense adjusting entries result in a debit to ________ account and a credit to a ____________ account
Expense; Payable (liability)
Adjusting entries are made for prepaid expenses because _____________ are overstated and _____________ are understated
Assets; expenses
Adjusting entries are made for unearned revenue because _____________ is overstated and ____________ is understated
Liability; revenue
Adjusting entries are made for accrued revenues because ____________ is understated and ____________ is understated
Assets; revenue
Adjusting entries are made for accrued expenses because ______________ is understated and _______________ is understated
Expenses; liability
** IMPORTANT***
What is the primary basis for the preparation of the financial statements?
The adjusted trial balance
What is the order of the t-accounts on the adjusted trial balance?
Assets, liabilities, Stockholder’s equity, Revenues, expenses
What is the last step in the accounting cycle?
To prepare the closing trial balance
Which 3 financial statements are prepared directly from the adjusted trial balance?
1) Balance sheet
2) Income statement
3) Retained earnings statement
True or False: At the end of the accounting period, companies transfer the temporary account balances to the permanent stockholder’s equity account
True – all temporary accounts are then transferred to the retained earnings account at the end of the accounting period
What are the 3 temporary accounts that get transferred to retained earnings at the end of the accounting period?
1) Revenue accounts
2) Expense accounts
3) Dividends
*** IMPORTANT **
Which 2 accounts get closed directly in to retained earnings?
Dividends and income summary
Income summary is a temporary account used at the end of the accounting period where ________ and ________ accounts feed in to
Revenue and expense
All temporary accounts have a _______ balance at the end of the accounting period
Zero
What type of company deals with products?
Merchandising company
What is the primary source of revenue for merchandising companies?
Sales Revenue
Which type of company has a longer operating cycle?
Merchandising
What 2 types of inventory systems can a company use?
Perpetual or periodic
The perpetual method of inventory is also known as the __________ method
Scanner
What type of inventory method maintains detailed records of the cost of each inventory purchase or sale?
Perpetual inventory method
True or False: A company that uses the perpetual inventory method determines cost of goods sold each time a sale occurs
True
The periodic inventory method is also known as the _____________ method
Mom and Pop
True or False: The periodic inventory method keeps detailed records of the goods on hand
False – It does NOT keep detailed records on hand
How is the cost of goods sold determined for the periodic inventory method?
By a count at the end of the accounting period
If a purchaser buys something from another company, the purchaser would debit _________ and credit __________
Inventory; accounts payable
If the purchaser pays freight charges, the purchaser would debit _________ and credit _________
Inventory; cash
When a purchaser returns goods to the company which they bought them from, the purchaser debits ________ and credits ________
Accounts payable; inventory
If a purchaser pays within the discount period of the other company’s credit terms, the purchaser would record that as a debit to ________ and a credit to _________ and _________
Accounts payable; cash, inventory
If a purchaser pays after the discount period of another company’s credit terms, the purchaser would debit ________ and credit _________
Accounts payable; cash
If the seller records the sale of goods to a purchaser, the seller would debit ______, credit ________, then in a separate entry, would debit ________ and credit _________
Accounts receivable; sales revenue; cost of goods sold, inventory
If the seller records the credit for returned goods from the purchaser, the seller would debit ________, credit _______, then in a separate entry, would debit _________ and credit __________
Sales returns and allowances; accounts receivable;
inventory; cost of goods sold
If the seller records the entry for money received from a purchaser who paid within the discount period, the seller would debit ________ and __________ and credit ________
Cash and sales discounts; accounts receivable
Advantages of the _________________________ is that it is simple and easy to read
Single step income statement
Advantages of the __________________________ are that it highlights the components of net income, and contains gross profit, income from operations, and net income
Multiple step income statement
On a multiple step income statement, normal operations take place where? Above or below the line?
Above the line
On a multiple step income statement, unusual operations take place where? Above or below the line?
Below the line
Interest revenue, dividend revenue, rent revenue, and gains go under the _____________ category on the multiple step income statement
Other revenues and gains
Interest expense, casualty losses, and other losses go under the ______________ category on the multiple step income statement
Other expenses and losses
Profit margin measures the ______________________
Percent of sales kept as net income
What are the 3 classifications of the inventory of a Manufacturing company?
- Raw materials
- Works in Progress
- Finished Goods
Taking a physical inventory involves _____________, _______________, and __________________ each kind of inventory on hand
Weighing, counting, and measuring
How does a company determine ownership of goods?
By counting all the goods for which the company has legal title
Goods purchased, but not yet received are called OR sold goods that haven’t been delivered yet are called…
Goods in Transit
FOB shipping point means that the ________ owns the goods while they are on the truck (in transit)
Buyer / purchaser
FOB destination means that the ______ owns the goods while they are on the truck (in transit)
Seller
In which transit method does the seller own the goods while on the truck?
FOB Destination
In which transit method does the buyer own the goods while on the truck?
FOB Shipping Point
Goods held for sale by one party, but are owned by another party are known as…
Consigned goods
The _________ is the owner of the goods that are being held by a company
Consignor
The _________ is the one holding the goods for another party, although they do not own the goods
Consignee
True or False: The consignor does not include the consigned goods in his / her inventory count
False – the consignor is the owner of the goods, and although the goods are not in their possession at the time, the ownership still belongs to them
True or False: The consignee does not include the consigned goods in his / her inventory count
True – the consignee is merely a holder of the goods, but they do not own the goods.
The amount of items left over after all sales have been made is referred to as ______________
Ending inventory
What cost flow assumption is being described: “Earliest goods purchased are the first to be sold”
First In First Out (FIFO)
Which cost flow assumption is generally used because it is the best business practice?
FIFO – it is better to sell oldest units first
What cost flow assumption is being described: “Latest goods purchased are the first to be sold”
Last In First Out (LIFO)
What cost flow assumption is being described: “allocates cost of goods available for sale on the basis of weighted average”
Average Cost
In periods of rising prices, FIFO reports lowest _______________, while LIFO reports lowest ___________
Cost of goods sold; net income and ending inventory
In periods of rising prices, FIFO reports highest ______________, while LIFO reports highest _______________
Ending inventory and net income; cost of goods sold
Lost sales could be a result of ____________
Low inventory levels
High carrying costs could be a result of _____________
High inventory levels
The market value of an object is also its __________________
Replacement cost (occurs mostly during price declines)
What is the term for the allowing of the transfer of funds without paper (deposit tickets, checks, etc.)
Electronic Funds Transfer (EFT)
Many employers send __________ through the EFT
Payroll
Deposits received by a bank are recorded with _________
Credits
Deposits received by a bank ___________ the bank’s liability
Increase
Payments and other deduction taken out of a bank account are recorded with __________
Debits
Payments and other deduction taken out of a bank account ______________ the bank’s liability
Decrease
Deposits to a bank are considered ____________ to the bank
Liabilities
______________ prevent one of the parties from recording the transaction in the same period
Time lags
________ can be made by either party (bank or company)
Errors
When reconciling a bank account, you reconcile the balance per _____ and the balance per _____
Bank; books
What are the adjustments made to the bank balance? (start with beginning and then add/subtract)
Cash balance per bank statement
+ Deposits in transit
- Outstanding checks
+/- Bank errors
What are the adjustments made to the book balance?
Cash balance per books \+ EFT - NSF checks - Service charges \+/- Company errors
The adjusted cash balance per bank and adjusted cash balance per books must be _________
Equal
What is used to record transactions included in the company’s books?
Journal entries
To record the collection of EFT (electronic funds transfer), you:
Debit ______
Credit ________
Cash; accounts receivable
To record NSF check, you:
Debit ________
Credit ______________
Accounts receivable; cash
To record bank service charges, you:
Debit _________
Credit ________
Bank service charge expense; cash
What do you always subtract from the bank statement balance?
Outstanding checks
What do you always add to the bank statement balance?
Deposits in transit
